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Food and Beverage: The Impact of the Ukraine-Russia conflict

Darren Rigden, Partner, Audit and Business Solutions
01/03/2022
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Ukraine is widely known as the breadbasket of Europe and the conflict currently experienced there will impact on wheat and grain supplies and costs. Russia supplies about 20% of world wheat exports, and Ukraine about 10%, according to the Food and Agriculture Organization (FAO) of the United Nations. Together, they account for approximately 13% of total global wheat production. Sanctions on Russia will further impact on supplies, and Russia may also retaliate with measures of its own to reduce supplies to the west.

The grains produced are used to make cereals and flour and therefore a wide range of products including bread, cakes and pasta will be impacted.

Any conflict is likely to result in issues with supplies leading to price increases and shortages. Wheat futures are already high, being at their highest point since July 2020.

There have been attacks in the southern part of Ukraine, which has the five main grain ports. This will disrupt supply chains for products which are ready to ship, while a prolonged war is likely to impact on this year’s harvest in the summer and the supply thereof.

In January, the FAO’s index of food prices rose to its highest levels since 2011.

In addition to grain, both countries are a major supplier of vegetable oil, most notably sunflower oil. Sunflower oil is the world's third-most traded vegetable oil after palm and soybean oil, with the Ukraine being the world's largest producer - followed by Russia.

Food price inflation generally is already high and further supply disruption will add to this, making food more expensive across the world.

As Ukraine’s currency begins to decline, the cost of their exports will be higher even if supplies can get through.

Indirectly, disruptions to the natural gas supply from the area affect the production of fertilizers which were already in short supply, making matters worse generally for agriculture and the food sector.

The overall impact for richer countries is that certain foods will become more expensive and possibly harder to source. For poorer countries food insecurity, which is already a concern, will be made worse especially for those who depend on Ukraine. In politically unstable countries this may well result in more conflicts leading to disruptions in other supply chains.

What does this mean for the food and beverage industry in the UK?

So, what can the sector do to protect itself? In short, it will be hard for the sector not to be impacted. I would recommend revisiting forecasts and keeping these up-to-date and monitoring forecasts. Clearly if supplies can be sourced from elsewhere that should be done now, but in all likelihood most businesses will have already started this process reducing the other options available. If you can source stock, and have the facilities, buying a little extra now may also be prudent.

Before agreeing to any new contracts, it is worth carefully considering:

  • the impact on margins
  • whether expected price increases can be reflected in the new contracts
  • whether you can ensure of the availability of supplies before signing any contracts which contain penalties and clauses in relation to supply issues.

Finally, if finances are tight, now might be the time to refinance or seek extra funding before interest rates rise again.

Unfortunately, the crisis is another headwind for the sector and businesses in general to weather.

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How can Crowe help?

Our team are experienced in helping businesses in the food and beverage sector adapt to challenges so that their businesses can continue to run smoothly, and they can assist you in developing a contingency plan to respond to the current uncertainties. Please contact Darren Rigden or your local Crowe contact, if you would like assistance in preparing a contingency plan.

Contact us

Darren Rigden
Darren Rigden
Partner, Audit and Business Solutions
Kent